Rational Advisor

When it comes to International value investing,few can take the crown fromCharles BRandes and his group in San Diego. I will be visiting with Charles on Nov 25th to Nov 28th.

Brandes follows the discipline of Benjamin Graham, in being strict value managers, and do not get caught in the economics of events. They actually do not see much worth in understanding economics, and maintain that the purchasing of good companies at a discounted price is the best approach.

Here’s some notes from my recent conversation with them.

- It’s interesting that over the summer, the lower P/E and value stocks were not popular, and higher P/E growth stocks were, even though we had so much volatility, people still wanted to chase growth. We find that strange.

- A high C$ means that foreign investments are cheaper and may be worht adding to.
- We are not hedged against any currencies, never have been and the reason for this is that we do not know of anyone that has a long term consistent record of outperfroming on currency.

- The toughest region for us has been Japan.
- In this last quarter, we have been adding to positions we are findig value in - these are in the financials sector inparticular Japanese financials. They were great drivers of perfromance for us in 2003-2004, we sold them in 2005 as they reached their intrinsic value, and we are adding back to them now. In Japan, we have 3 or 4 financial companies that are down 15% to 30% over the year, it is these that we are adding to.
- The public forgets , and Benjamin Grham reminds us that, you’ve got to have periods of underperformance to build strong periods of outperfromance - otherwise how would you be bale to have value purchases. Look at our historical returns, in every one of our mandates, where we have underperformed for 6 months, we have followed that up with outperformance - we are not concerned about our recent under performance. - we are fully invested and taking advantage of fallen names.
- In regards to Canada, we have a zero weightign in Energy, zero in Materials and Minerals (Gold), our two largest sectors are Forestry (11%) and Autoparts (10%), in fact about 50% of our Canadian portfolio has been negatively affected by a rising C$. So we look like turkeys, but we continue to like what we are holding, and they continue to show good value. We believe in sticking to our discipline, we will have our day in the sun. We cannot find value in Energy, Materials, and Gold. Similarly in 2000, we could not find value in technology.
- The reason we are not in Energy, is becasue the Return on Capital INvested has over the last 15 years been about 6% to 12%, all of a sudden in the last two years the REtun on Invested Capital has risen to 30%. This is a dramatic change over history, and abnormal.
- We are not industry specific, we think it is very difficult to invest solely in one industry, call it Energy, Financials or Gold.

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